In 2016, real GDP registered its lowest growth in 8 years (+2%) as a result of the severe oil price shock experienced since 2014 and weakening demand from regional partners.

The economy is expected to decelerate further in 2017 despite higher oil prices and an ambitious infrastructure program (4G). While crude oil accounts for 40% of total exports, oil revenues will remain capped as production continues to fall (120bbl/day in May, from a peak of 130bb/day in early-2016).

Moreover, the rise in VAT from 16% to 19% will weigh on private consumption and tourism-related activities. All in all, we expect economic growth to be below 2% in 2017. A modest rise to +2.9% in 2018, will still place it well below the 2010-2015 average of +4.5%.

Moderating inflation allowed for a supportive monetary policy. To sustain the recovery the central bank cut the key rate by 325bps since September 2016 (125bps cut since the beginning of the year) to 6.25% in May 2017, its lowest level in 13 months. After a peak of +9% y/y in June 2016, consumer prices have moderated to +4.7% y/y in April, still above the 3% ±1pp inflation target range. Monetary authorities expect inflation will converge to the central target by 2018.

Public and external positions are overall sound

The trade balance has been steadily improving for a year, mostly due to a decrease in imports, while exports have just started recovering. Hence, the current account deficit, which reached in Q3 2015 -6.7% of GDP, narrowed to -4.4% in Q4 2016. It is expected to improve further over the next two years thanks to the recovery in exports.

Moreover, the external deficit is more than entirely covered by net FDI inflows. External debt is reasonable (44.6% in 2016) and import cover is comfortably above 7 months, although it dropped from 10 months in 2016 with the recent rise in imports.

Although the fiscal deficit widened with the fall in oil revenues, the structural deficit declined to -2.8% of GDP according to the IMF, remaining consistent with the fiscal rule. The recent VAT rate hike attests to the country’s resilient fiscal policy tightening. Fiscal balance should improve in 2017 (-2.8%).

Strong business environment

Colombia has strengthened its macroeconomic fundamentals since the early 2000s thanks to sound macroeconomic policy reforms. This was due to the adoption of (i) a credible inflation targeting regime, (ii) a freely floating exchange rate, (iii) a structural fiscal rule and (iv) a solid financial regulation. According to the World Bank’s Ease of Doing Business survey, Colombia ranks 2nd in Latin America (53 of 190 worldwide), after Mexico (47th). The peace accord with the FARC, although contested by the opposition, also sets the stage for positive developments.